A financial modeling approach to industry exchange-traded funds selection

Thomas Conlon, John Cotter, Illia Kovalenko and Thierry Post

Journal of Empirical Finance, 2023, vol. 74, issue C

Abstract: This study uses a comprehensive approach to optimize the portfolio allocation to equity sector Exchange Traded Funds. We combine data on the market prices of options written on the funds, the Heston stochastic volatility model, risk premium transformation, copulas, and optimization with stochastic dominance constraints. This comprehensive strategy provides significant performance out-of-sample gains relative to the passive and active alternative strategies, both before and after accounting for risk and transaction costs. Our findings point at market inefficiencies that can be exploited using sector funds, past public data, and blending multiple methods.

Keywords: Sector exchange traded funds; Portfolio optimization; Option-implied distribution; Copulas; Stochastic dominance (search for similar items in EconPapers)
JEL-codes: G11 G18 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823001081

DOI: 10.1016/j.jempfin.2023.101441

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